Sunday, March 07, 2010

SUMMARY:- Jobs number may have been a throwaway, but stocks rally all the same.- NASDAQ joins small and mid-caps over the January highs while SP500 moves into that January range.- Jobs report tops expectations, kind of, with some good news and some bad news.- Government jobs will lead the jobs recovery through summer, but does that help?- Treasury revises deficits massively higher longer term and for 2010 as projectsion prove futile.- Nice rally leaves many stocks extended after good runs, but others are setting up to start stepping up.

Regardless of the validity of the jobs number, stocks post an impressive rally, at least on NASDAQ and the growth areas.

The jobs report on Friday was a throwaway given the terrible weather that skewed the results. It was still better than expected, however, and investors took it as a positive. It originally called for a loss of -20K jobs to start the week, but then Lawrence Summers said we could have -100K or -200K jobs lost due to the weather. Expectations were revised to a -68K level in the aftermath of those comments. -36K topped expectations but did it really? Prior to this, expectations were for a 20K decline. Therefore, you always have to look past the headlines on these numbers to see what is really going on.

In any event, the market did not seem to mind. On Thursday, I said that once the jobs report got out of the way (whether it was good or bad), the market would show its next move. It did start to do that; buyers came in and jumped the market higher. Even SP500 gapped higher on Friday, and it was aided by financials and many stocks across the board as breadth was strong. There was a strong early surge in the first hour, and then there was a gap around the half-hour point. That is where SP500 gapped into the bottom of the January consolidation at 1131. It gapped through that number and rallied further, it consolidated, and then it rallied toward the top of the bottom of the January range. That may sound confusing, but you have to look at things in that respect. This is a wide trading range, and how far it can make its move inside the range is an indication of how strong the move is. The SP500 gapped higher and raced to the peak, putting it in the middle of that range. It was, no doubt, a strong move in terms of price and bringing the buyers back into the market. . NASDAQ also enjoyed a strong move. It gapped sharply higher as well and rallied through the top of its January range and made it by .7. It closed above the prior January high and rallied on stronger volume. Now it joins SP400 and the SP600 small caps, moving through the January peak to a new rally high following the March 2009 lows.

OTHER MARKETS

Dollar. The dollar started stronger given some decent economic data. It was trading at 1.3559 Euros prior to the open, better than the 1.3581 shown on Thursday. As the day wore on, the dollar once again faded off its highs. At the close it was down against the Euro (closing 1.3618), breaking back above the 1.36 level that used to be the bottom of the range. It has broken through several times and can easily rally back up since the ice is broken, but it had also failed to take advantage of that move. It is getting shoved back down each time. It is a strange move because one would expect the dollar to strengthen as the economy strengthens. Investors obviously were not that excited about the jobs number. They must have viewed it as something of an anomaly given that the weather plays such a significant roll. It is strange that the dollar is not surging higher with the market if this is based on a stronger US economy. The dollar is still in its uptrend, but it made a break lower on Wednesday that broke its near-term trend. Since then, you have to watch it closely to see what it does. It could continue to consolidate and start higher as it did in late December and early January. Indeed, this is a very long, strong move from mid-January up to the end of February, and one would expect some kind of consolidation. It is giving it right now, and it is still in decent shape thus far. It has not rolled over by any means.

Oil. Oil prices had set up and are now making their move toward the top of the range. It had a nice, strong surge in February, it had the consolidation, and then the start back up this weekend. If the US economy will recover, and if China and India remain strong, then demand for oil should be higher. There is still concern about Europe, but the market is pricing in more demand for oil, and it is starting to bump into the upper end of its range that it has traded in the past five months. It has been stuck here for some time, and this will be an important test. It made a higher low on the last test, it rallied and consolidated, and now it is sprinting toward that high. My anticipation is that it will break out this time. It may stall back somewhat afterward and come back, but it has the momentum since it rallied and paused before taking on the old high. Oil closed up on the session, depending on what market you are looking at. New York (81.77, +1.56) happens to match, almost to the penny, the Light Sweet Crude Index.

Gold. Gold was struggling on the session. It did not make a clear break to the upside, although it did close positive (1,133.80, +.70). There is a bit of a different read depending on which market you look at. During the week, it made a renewed break higher from the prior trendline break in February. It broke the downtrend line, tested it, and rallied this week. It closed the week testing that move, sitting right on top of a support level. Gold looks ready to move higher again. For those interested in gold, you can play this rally up to the prior peak and likely higher toward the all-time high hit in December (over 1200).

Bonds. Bonds have been trading strangely, but they were trading on Friday as one would anticipate if we assume the economy will recover. If the economy recovers and the Fed raises rates, then you would anticipate bond yields to rise and bond prices to fall. That is exactly what happened. The 10 year bond closed with a yield of 3.60% on Thursday. On Friday, bonds sold off sharply as stocks rallied, closing the 10 year at 3.68%. That is a significant one-day rise that shows there was finally some selling in bonds. Bond investors bit the bullet and fell in line with the fact that the Fed must raise rates if the economy will continue the recovery. It may be a slow recovery in process, but it is a recovery nonetheless. Bonds are in jeopardy of peaking out. After rallying back the past two weeks, they have come up to a resistance point and are in a position where they could turn over and fall back down looking at the TIPS where the next support is at the 103 level.

Breadth. Breadth had a very strong upside session with 3.8:1 advancers on NASDAQ and 4.7:1 advancers on SP500. With the SP500 moving up to the January ranges, as well as SP600 and SP400 trading sharply higher to new rally highs, you would anticipate breadth to be solid as it was on Friday.

Volume. Volume moved up on NASDAQ, moving back over above average on that index and trading at almost 2.3B shares, up 10% on the session. That was a very solid move higher on that strong, above-average volume. It was not as high as prior volume, but it was the good surge in volume that you want to see when an index moves to a new high. Volume on the NYSE was up 10% as well, trading 1B shares. Unfortunately, that does not get it above average. Even though SP500 moved up to the prior peaks and the mid-caps and small caps solidified their move over those levels, volume is still somewhat anemic. Can we really complain about that? Yes and no. I would like to see better volume given that the indices are taking out prior highs. Before this, it was just a trade up inside the trading range, and you should not worry that much about volume in that case. I would like to see expanding volume on this move. NASDAQ is showing it. Looking at the NASDAQ chart, there was high volume early in the week as the market gapped higher. There is no doubt that the techs are showing this kind of volume.

CHARTS

NASDAQ. NASDAQ's volume was up, and there was strong volume early in the week as NASDAQ broke higher over the February interim peak. It was a very strong move with good volume, and that shows plenty of buyers backing the rally to the upside. NASDAQ moved through the January range, clearing the intraday peak by 0.7. It was not much, but cleared it, so that shows that some of the ice is being broken. People always want to attach significance to one specific point in any move. That is usually a fool's errand because the market will overshoot to the upside and downside before it hits equilibrium. This does not answer all of the questions, but it does show when you consider the volume and recovery in stocks such as AAPL and GOOG that the tech buyers are back in the mix. There is still upside here, and it would take a big reversal to bring the sellers in and push this back down.

SP500. While it did rally, SP500's volume was still below average. It was somewhat of a disappointment given that the index is bumping up into the key level of the January consolidation. It is halfway into the mix and showing good strength to the upside. The question is whether it will make it out of here. I anticipate, with the other indices breaking through, that the SP500 could get up to this level and then the other indices SP600 and SP400 will come back to test their breakouts. When that happens, SP500 will come back and test around the 1125 level, where are there is support. It can use that as a staging area for the next move up toward the breakout over the January peaks. It was in an ABCD down pattern, but it looks like it will try to break that up and follow the rest of the indices higher thanks to the financials helping out and lending more support on Friday.

SP600. SP600 added to its gains on Friday. It already broke over the top of its range early in the week, and it even tested it for one day before moving higher and solidifying its gains to the new rally high. When the small caps move well, that is a positive for the economy because they indicate what is coming up ahead. If the small-cap stocks are anticipating greater earnings (as they are by building in higher prices), that means a better economy down the road.

SP400. The SP400 are speaking the same language as the small caps, as they showed the same movement, fortifying their positions above the January high. It was a very strong move, and the mid-caps are also a good indicator for the future health of the economy. It is not as good as the small caps because they are very much dependent on the US economy alone, rather than other economies overseas, to buy their products. But it is still a good thing to see.

DJ30. The Dow Jones is still not at its January peak. Similar to the SP500, it is right at the bottom of the range but has not made a break over. Indeed, SP500 is leading the Dow with respect to its advance. Dow volume was still rather anemic, and that is what SP500 is showing as well.

SOX. The SOX is nowhere near its January peak. It has been lagging, but it has made a higher low over a support level. On Thursday, it reached way down to that support level intraday and snapped back. There are chip stocks that may prove to be buys for us, and I was looking at some late last week. I held off putting them on the report, but we could definitely move in with some chip stocks this week because they are not overbought like many other stocks that have led this move higher. The market moves up in waves. Once some areas are extended, the money will come out of them a bit and be taken elsewhere as the big-money funds look around for other places to put the profits. That means they will be looking to other areas that have lagged somewhat that would be chips and financials, for instance. These are places we need to be looking for the next move higher.

Does this mean that there is no trouble? Not necessarily. Three indices the SOX, Dow, and the SP500 have not made their breaks higher. The moves from other indices have mitigated the danger to the downside, but some of the stocks in leadership are still in patterns that could suggest selling. That does not mean the entire market will sell. It could just be those particular stocks in those sectors that sell off, but we need to be aware that the SP500 and two other indices have not made the new highs yet. SP500 gives every indication that it intends to make that break, but we have to see it do so. It may take another two weeks for it to make that break if it comes up and tests back before moving higher. I would not complain about a test, but I want to emphasize that it is not going to be a straight, upside shot. Everyone is convinced that the upside is at hand and will stay here, so we need to watch out for other sectors that are in trouble and may act as a drag on the indices. They could also give us downside plays even as the rest of the market moves up. We have both upside and downside plays in hand, and that can be profitable; we took a lot of gain off the table on Friday and during the rest of the week.

LEADERSHIP

Retail. Retail continues to move higher. Retail stocks, despite a low consumer confidence reading, show tremendous upside gains. Same store sales were solid this week, and they have already built in a lot of gains prior. There were strong moves over the past four weeks for many of these stocks, and they have made us some money along the way. ANN is one of these. PNRA consolidated laterally and made a strong breakout on Friday. Retail continues to perform well; indeed, it outperformed much of the market. As with the small caps' relationship to economic improvement down the road, retail stocks tend to start higher early when they anticipate there is economic improvement (and thus better consumer consumption down the road). We have been seeing that for months with the retail stocks.

Financial. Financials are moving up. GS started to break higher on Thursday and gapped to the upside on Friday, continuing that move. JPM joined in the action on Friday after a brief flag consolidation and gapped higher. WFC had been moving up slowly on low volume over the past few sessions. It gapped higher on Friday on stronger trade, though it is at some resistance. It is definitely not in a buy position until there is a test.

Technology. Technology is running well after being shaky just a few weeks back. AAPL was one of the problems in testing the key range in January, but it put that to the side with a gap above that level on Friday. This is a breakaway gap: there is strong volume and move over the prior resistance levels. AAPL is putting its iPad out in April in the US and many other countries. I am looking for a chance to move in on this breakaway gap. There is usually a sideways lateral move, and that gives the opportunity to take up new positions. It looks like AAPL might be a good play. Do not give up on a stock just because it gaps. Breakaway gaps can be great indications and setups for new runs to come because, when a stock makes this kind of gap, it tends to run in the direction of the gap after a bit of hesitation. We look for that and then can move in. GOOG is also showing solid strength, and we picked it up. I noticed it was moving, and I am kicking myself for not getting in right where it showed that the buyers were back in at a key support level. It gapped higher on Friday on strong volume. It is also not in a position to buy right now. It did clear some important resistance, and if it comes back and fills this gap, we might be able to squeeze in a play up to 575 maybe beyond that if things continue to improve.

Energy. Certain parts of energy continue to improve. CVX is starting to break higher and clear some resistance, and that gives it room to run up into the next range. We might be able to get a trade out of that. It is not going to run to 100 overnight, but we might get a trade out of that kind of setup. CNQ, a Canadian natural resource, mimics the price of oil. Now that the price of oil has broken toward the top of its range, it cleared an important resistance range and gapped higher on Friday.

The refining sector took off rather unexpectedly; cost-versus-pricing has hit a sweet spot, and they have taken off to the upside. VLO is moving past the January and early February resistance, as well as resistance points at that level from prior months on strong volume. We will see if it backs off and comes back and tests this level we could then have a nice trade going to the upside.

Semiconductors. Semiconductors have not rallied as much as the rest of the market. FCS has formed something of a triangle, making a higher low. I am not saying this is ready to buy just yet, but it did have distribution this past week and held up. It is interesting, and I will watch that to see if anything comes out it that we can take advantage of. TQNT made a nice break higher after a horrible gap down in October. It has broken higher and come back to test its break, holding the 10 day EMA. It has some room up to the gapdown point (indeed, up to the October peak). $7.00 to $8.50 is not a bad run, and we could pack in a 20% gain on the stock play alone. MSCC broke higher over a consolidation point as well, and is moving on solid volume. It is something we may get a play out of, and I just want to see what will give the best risk/reward. Remember, the overall market has put in some big moves and is somewhat extended, particularly sectors that have been moving well. They are extended, and you do not want the throw a bunch of new money at them right now. We were letting our positions taken last week and earlier this week run higher for us on Friday. I did not want to buy a bunch of new positions, but wanted to take some gain. It is all about when you move in and when you buy. A stock can continue to run after a big move; you can get lucky that way, but stocks often surge and rest. The entry point is important, particularly when things are a bit extended and you are looking for trades

Steel, Coal, Industrials. Steel is having some issues. STLD moved up on Friday; indeed, it was up for the entire week and more. But it is still part of the downside ABCD pattern. There was low volume as it moved up on Friday, and it is still in a big, thick resistance band. I am still looking at it as a potential downside play because it has rallied with the market on the move higher, but it has not changed the complexion of the pattern at all. The character is still the same, i.e., it is in a negative pattern.

BTU was up on Friday, and its volume was better. It may make something out of this, but it is in that ABCD downside pattern. I want to watch this and see how it resolves. If this break higher can hold, we will forget about it for the downside and see what forms upside. Looking at the market, you cannot have rose-colored glasses on either way as to what is going on. Look at both sides and have plays ready for both based on what stock patterns are showing. Then, when the market moves, you can make your plays. The market was moving up on Friday, and we made a lot of money to the upside because our downside plays did not come into play (so to speak) on Friday's gains.

CAT was not that strong on Friday. It has an ABCD pattern as well. It gapped higher but volume was still anemic, and it is still below serious resistance. It tapped that resistance on Wednesday. There are still strong, well-known stocks that are struggling, and that is why the SP500 has not broken through its January peaks yet. A big part of that, of course, was when the financials were not moving anywhere. It was difficult for SP500 to make any serious upside traction.

The VIX has been tanking, down another 1.3 on Friday. Volatility gapped lower and is now at the mid-January low. All of the fear in the market in late January and February has dissipated, and it is now trading back at the recent low. That is what set off the next run higher, of course. You have to watch for that a little, although the action on Friday put some nails into the theory that the market will roll over any time soon.

Looking at the big picture, volatility is down below 20. The typical range used to be from 20-30, but volatility can run significantly lower. It is trading at a support point where it traded in 2008, mid-year, and then again in 2007. Going back even further, it is still well above the ranges hit from 2004 to 2007 as the market rallied back. Even though it seems low right now, as the market rallies, it can get lower and still have no trouble for stocks moving higher.

VIX: 17.42; -1.3VXN: 17.92; -1.18VXO: 16.81; -1.12

Put/Call Ratio (CBOE): 0.83; -0.18

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

Bulls: 42.1%. Bulls rising but slowing the move (41.4% last week) after the 5 point run the prior week. Rising from 35.6% and over the 35% threshold level below which suggests bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Getting close to the 35% level that is the threshold for what is considered a bullish climate. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level. Dramatic rise from 21.3% in November 2008, the bottom on this leg. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator.

Bears: 22.7%. Down from 23.3% last week, also slowing the move after dropping from 27.8%. Over 35% is considered bullish for the market, so still a ways off even though bulls are falling to a bullish level. Continuing the rise from 16%ish on the lows this leg where it held for several weeks. Peaked near 28% in November, falling short of the 35.6% hit in July 2009. For reference, cracking above the 35% threshold considered bullish. Hit a high on this run at 47.2%. For reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

Stats: +34.04 points (+1.48%) to close at 2326.35Volume: 2.283B (+10.23%)

Up Volume: 1.918B (+641.662M) Down Volume: 367.213M (-441.357M)

A/D and Hi/Lo: Advancers led 3.83 to 1Previous Session: Advancers led 1.41 to 1

Big economic reports coming out are the initial claims, the weekly claims report on Thursday, and retail sales on Friday along with the Michigan Sentiment. Business inventories will be interesting to see with respect to whether businesses are still liquidating inventories or trying to build inventories in anticipation of economic recovery.

As for the market itself, SP500 is bumping up against this resistance level and trying to follow NASDAQ, SP600, and SP400 higher. It is likely to come up and bump this level; the momentum is definitely to the upside now. We do not have a lot of stocks within leading sectors that are in good position to buy. We were just letting our positions that we took earlier rise and make money for us. Indeed, we took quite a bit of gain off the table on Friday because the moves have been strong to this point, and the indices have broken through resistance. Often there is a test quickly after they make this break. With SP500 moving up toward the peak, it would be natural for it to bounce up, hit that level, then come back to test before moving back through. We were taking some gain off the table because, number one, there was the gain. In some positions, we wanted to take options because they were March options and there were good gains to take off the table. But we also always take gains as we move up because we are not out of the woods there can be reversal off this level. The action for the last couple of days pushed that to the back burner, but we cannot forget about it altogether. SP500 has not made a break, and until it does, it is still suspect. We did take a lot of nice interim gain off the table because it was there, and you do not want to lose it after such a strong run. This was a late-week run, and when there is a late week run, you typically get some kind of giveback to start Monday. You buy on Monday and sell on Friday.

We are still going to look for upside plays there could be some out there. There are sectors that have not participated in this rally. They may have been leaders earlier in the rally, but have had to consolidate and may be setting up. We will look at those for upside positions because they can still move higher. Indeed, we took a couple of positions at the end of the day on Friday because they were in good position and held their gains. We will continue to look for those, but we will not be buying everything we can get our hands on. At the same time, I still want to look at downside positions. They did not pan out for us. We were ready in case they did, but a lot of those stocks are still in the same patterns and did not change their character even though the market shot higher and NASDAQ broke through it January peak.

We will still be looking downside because, number one, they present opportunity whether the market moves higher or not. Secondly, if the market does reverse for some reason, we have to deal with that. Right now, there are issues still out there. Europe is having trouble even though it showed better data on Friday. Europe is a day-to-day soap opera. Then there is the issue here at home with regards to spending and the healthcare bill they will try to push through over the next week or two. That is locking up a lot of money we simply do not have. The market has not reacted adversely to it yet because there has been so much liquidity from the Fed, but it will have to start raising at some point, and there are more auctions of bonds next week as well. At some point, the market has to choke on it. It has not done it yet, and the market can always run further than you think it can or should. Do not get into over-thinking the market. Be ready, as we have been, whether it breaks upside or downside. You will have to throw away some plays, but be ready to use the other half of the plays you have in your quiver and ready to shoot. We will look for opportunity to the upside on stocks that are not extended. We will look for a pullback at some point to be able to move in and pick up some of these stocks that have made good rallies and are going to be testing. PCLN, NFLX they are out there. They have made good moves and will come back to test again. We need to be ready for those, and we will have a few downside plays in case there is a reversal. That does not look to be in the cards, but the low volume on the NYSE is still a worry along with the fact that the large caps have not caught up with their kin. But the ones that are ahead are the growth stocks, and that bodes well overall for the market. Have a great weekend.

Support and Resistance

NASDAQ: Closed at 2326.35Resistance:2324-2370 is a range of resistance from early 20082382-2395 from 20082412-2415 represents a series of peaks and lows in 2007, 20082453 is the August 2008 peak

Support:2320 to 2326.28 is the January high2319 from the September 2008 peak2292 is a low from January 20082273 to 2282 marks bottom of January 2010 lateral peak2275 - 2278 from the February 2008 and April 2008 lows2245 from July 2008 through 2260 from late 2005. The 50 day EMA at 22262210 (from September 2008) to 2212 (the July 2009 closing low)2205 is the November 2009 peak2191 is the October 2009 peak2177 is a low from March 20082169 is the March 2008 closing low (double bottom)2168 is the September 2009, intraday peak2167 from the July 2008 intraday low2155 is the March 2008 intraday low2143 is the October 2009 range low2099 is the mid-September 2008 closing low2070 is the September 2008 intraday lowThe 200 day SMA at 20702060 is the August peak2048 is the early October 2009 closing low2015 from an early August 2008 peak

S&P 500: Closed at 1138.70Resistance:1151 is the January 2010 peak1156 is the Sept 2008 low1185 from late September 20081200 from the July 2008 low

Support:1133 from a September 2008 intraday lowBottom of the January 2010 consolidation 1131 to 11361119 is the early December intraday high1114 is the November 2009 peak is breaking1106 is the September 2008 lowThe 50 day EMA at 11041101 is the October 2009 high1084 to 1080 (September 2009 peak)1078 is the October range low1070 is the late September 2009 peak1044 is the October 2008 intraday highThe August peak at 1040The 200 day SMA at 1039The early October 2009 closing low at 1025The early August intraday peak at 1018The November 2008 peak at 1006 closing 1007.53 intraday992 is the August 2009 consolidation low

Dow: Closed at 10,566.20Resistance:10,609 from the Mid-September 2008 interim low10,730 is the January 2010 peak10,963 is the July 2008 low

Support:10,496 is the November 2009 high10,365 is the late September 2008 lowThe 50 day EMA at 10,31810,285 is the late December consolidation peak10,120 is the October 2009 peak9829 is the September 2008 closing high9918 is the September 2008 peak9855 is the early September peak in its lateral range9835 is the late September 2009 peakThe 200 day SMA at 96709654 is the November 2008 high9625 is the October 2008 closing high9620 is the August 2009 peak9430 is the early October low9387 is the mid-October peak

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.